Posts filed under “Currency”
Numerous people have written, asking about how much liquidity is really in the financial system. I suspect the underlying cause of this inquiry is the October 8 commentary by John Hussman, titled The Bag Will Not Inflate, and Liquidity Will Not Be Flowing.
I have a lot of respect for John’s methodology, but I think he may be understating the impact of all this cash sloshing around. Central bankers around the world can and do and are having an impact on money supply, liquidity, and equity prices.
Have a look at the October 11th St. Louis Fed’s U.S. Financial Data:
MZM (updated through 10/11/07)
chart courtesy of Federal Reserve Bank of St. Louis
To more specifically quantify this, the accompanying table reveals the degree of money creation at an annualized rate. As of August 08th, MZM had a growth rate of 24.3%:
MZM Annualized Growth Rate (08.06.07)
Note that this was before the Fed’s cut in the discount window rate, and prior to the global injection of liquidity by Central Bankers.
Despite the increase in dollars, and the decrease in dollar value, the government maintains the fiction that we have a strong dollar policy (U.S. Affects a Strong Silence on Its Weak Currency).
What is the impact of all this money supply growth? An incredible shrinking dollar.
While we can intellectualize about it, you really need to travel abroad to see the impact. Doug Kass is in Italy this week, and he is astonished at how feeble the dollar is overseas. The price of the Euro
against the U.S. dollar really hits home once you leave the USA. He notes that those that have been "non plussed by the continued
erosion of our currency will have a jolt of reality" when going abroad.
Some spending figures from Rome:
Dinner for two last night in Roma? $320 (U.S.)
Price of refueling an
empty tank in my auto on Thursday? $175 (U.S.)
Hotel per night? $850 (U.S.)
Bellini? $24 (U.S.)
Dry Cleaning of shirt I poured Chianti on? $20
Two days in Roma? Priceless!
Doug is the 20th person who has related the same details to me . . .
U.S. Financial Data
Federal Reserve Bank of St. Louis
October 11, 2007
U.S. Affects a Strong Silence on Its Weak Currency
EDMUND L. ANDREWS
NYT, October 10, 2007
The Incredible Shrinking Dollar
Market Beat, September 27, 2007, 3:05 pm
Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.
Today, we look at a few
printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.
This is simply a measure of how much cash the Fed is injecting into the system.
The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:
Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.
This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.
As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?" I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless.
Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less.
Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
Its easy to understand why inflation has been called The Cruelest Tax.
BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.
There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.
Federal Reserve Bank of St. Louis’
Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1
Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6